M&M: Tractor pick-up to boost profitability

Launches in the compact SUV segment should help volumes

The Mahindra &Mahindra  stock, which has under-performed the automobile index since the past one year, has key triggers going for it. New government policies should aid tractor sales and the coming launch of compact utility vehicles that are expected to help plug product gaps.

The government had last week announced it was allotting Rs 50,000 crore for irrigation and reforming the national agricultural market. The initiatives, according to analysts at JPMorgan, will improve agricultural incomes and benefit tractor segment sales over the medium term.

In FY15, tractor sales volume was down 12 per cent, with industry sales   just under 600,000 units. While the current monsoon season is underway, analysts believe the situation is much better than last year, when there was a severe deficit. And, this is yet to reflect on the sales of tractors, which fell 13 per cent year-on-year in June. Analysts also say tractor sales seem to have bottomed out and the pace of volume slowdown has decreased, given that April and May registered volume declines of about 18 per cent year-on-year.

Any uptick should help M&M, which has a market share of nearly 42 per cent. The company has lost  share, albeit marginally, with the June quarter volume decline of 18 per cent as compared to the industry sales fall of 16 per cent. It is the higher contribution from tractors which should help the company report a 120 basis points improvement in margins on a sequential basis for the June quarter. On the whole, with overall volumes down eight per cent, M&M's net profit is seen declining 15-20 per cent year-on-year in the quarter.

Why tractors are important to M&M is because they contribute about 45 per cent to the standalone or core earnings before interest and tax (Ebit). The segment, which is highly profitable, had reported an Ebit margin of 15 per cent (overall margins 11 per cent), despite a 14 per cent fall in volumes in FY15.

The Street will also keep an eye out for update on the three new utility vehicle platforms that the company expects to unveil this year. The launches, especially in the compact SUV segment, are important, as this has, in addition to premium hatchbacks and entry level sedans, seen double-digit growth in FY15. The company’s prospects could improve if some of the launches are able to get traction.

Analysts peg the sum of parts target price at Rs 1,440. Of this, 71 per cent of the value comes from the auto segment, which comprises the key sub-segments of farm equipment and utility vehicles.